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The do-nothing option

Rochester Business Journal

February 3, 2012

The "do-nothing" label often is slapped on Washington lawmakers, but what if Congress truly did do nothing about the federal deficit?

This option was laid out in detail on Tuesday in the Congressional Budget Office's annual "baseline" budget projections for the next decade. This document is a benchmark, not a forecast; it is designed to inform lawmakers about the impact of possible policy changes.

The current-law baseline assumes no changes. That means the Bush-era tax cuts will expire as scheduled, the reach of the alternative minimum tax will expand next year from 3 million taxpayers to 30 million, Medicare payments to doctors will drop sharply and the Budget Control Act of 2011 will cut spending more than $100 billion a year starting next January.

What would the do-nothing option mean for the federal budget deficit? According to the CBO analysis, the projected $1.1 trillion budget gap for fiscal year 2012-7 percent of the nation's gross domestic product-in a few years would fall below $200 billion and average 1.5 percent of GDP.

So leave things alone and goodbye fiscal crisis. But that will not happen.

Politically, the do-nothing option is a non-starter, especially in a presidential election year. For the economy's sake, that's a fortunate thing. As the CBO notes, the combination of higher tax rates and spending curbs would drag down real GDP growth for years.

The report also contains an alternative fiscal scenario in which the Bush tax cuts are extended, the AMT is indexed for inflation after 2011 and so on. These changes would ramp up economic growth-but the budget gap would be far larger and public debt would balloon to 94 percent of GDP in 2022.

The good news is these are not the only options. As CBO director Douglas Elmendorf told Congress in September, a third way exists: policy changes without immediate tax hikes or spending cuts that "would substantially reduce deficits later in the coming decade (and) both support the economic expansion in the next few years and strengthen the economy over the longer term."

Indeed, a credible long-term plan to reduce federal deficits alone would have a powerful beneficial impact on the economy by removing uncertainty. That really would be doing something.